I received a variety of annuity quotes from my Pension provider including one for an annuity that will increase each year by 3%pa and one for an annuity that will not increase. I like the increasing annuity but the initial income is a lot lower than the income from the annuity that will not increase and I am undecided as to which to choose.

Peter Sharratt Answers:

Increasing Annuity will initially pay a lower Income compared to a Level Annuity. However, the income from the Increasing Annuity will increase each year and eventually it will pay the same amount of income, and thereafter more, as the Level Annuity.

If you selected an Annuity that increased at 3%pa it would typically take about 14 years for the income to equal that of the Level Annuity. This means you will have waited 14 years to get the same income from the Increasing Annuity that you could have had from the Level Annuity now. During the previous 14 years the Level Annuity was also paying a higher income. Over time though, as the Increasing Annuity goes up the difference each year reduces.

To analyse both we need to work out how long it will take for the Accumulated Income from the Increasing Annuity to equal the Accumulated Income from the Level. This will typically be about 26 years; if you retire at 60 the Increasing Annuity will not represent better value until you are 86. In my experience the first 5 to 10 years of retirement are when retirees need the most income as they are now doing all the things they planned to do when they retired.

Given this and the figures above, I would suggest that the Level Annuity is the better option but you obviously need to consider your own personal situation. It is also a fact that life expectancy has increased and we can expect to live for longer. An alternative solution could be a With Profits Annuity as the income from this type of Annuity can increase depending on the performance of the underlying With Profit Fund.

Equally though the income can decrease but there will be a Minimum Guaranteed Income albeit lower than a traditional Annuity. You do not have to buy your Annuity from your existing Pension Provider; you can shop around which can be worthwhile as the difference could be an extra 20%. An Independent Financial Adviser will be able to review your options fully.

If you would like more advice regarding this issue or any other financial services matter, please contact us. 

If you would like to receive Kirk Rice’s Financial Services Questions regularly by email, simply email info@kirkrice.co.uk stating Financial Services Questions in the subject heading and we will add you to our distribution list.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.

My fiancé and I are saving hard to give ourselves a deposit for our first home. We hope to have enough to be able to buy a flat or ideally a house in about 3 years. We have been saving already for 2 years and are very disappointed with the Interest Rate we are getting. What can we do?

Peter Sharratt Answers:

As you will need the money in about 3 years I would suggest your options should be limited to a good Deposit Account. If you shop around you could expect to get about 2%pa Gross possibly as a special rate for 1 year at which point you would need to shop around again. Putting money in to Cash ISA’s would also mean you will not pay tax on any Interest.

Unfortunately staying in a Deposit environment does mean accepting a low Interest Rate and ultimately your savings are going to increase more by the new money you add each month rather than the interest it actually earns. On a positive note house prices seem to be fairly static at present and assuming this continues you should find that for the purchase price you are aiming for today should be able to buy the same type of property in 3 years time. Investing is possible but 3 years is really too short as investments fall as well are rise in value and there is a real risk that at the time you need the money its value is less than you put it in.

Over 3 years even good returns will not have that great an impact on your savings and not enough to justify the risk you may get back less. If you save £500pm for 3 years at the end you would have saved a total of £18,000. If the money was held in a good Savings Account and received an Interest Rate of 1.60%pa (net of Basic Rate Tax) the Interest would total £423. If you Invested the money and managed to get a consistent 8%pa (a high return to expect over 3 years) the growth would be £2,182 (ignores charges), i.e. an extra £1,759. If however the next 3 years proved to be bad for Investments and you actually saw a consistent negative of 4%pa you would have lost nearly £1,030.

A very good return gives you £2,182; a bad return sees a loss of £1,030 whereas relative safety gives you £423. Please note that the Investment figures are purely examples and in reality investment returns are never smooth but the example serves to illustrate my point and the risk.

If you would like more advice regarding this issue or any other financial services matter, please contact us. 

If you would like to receive Kirk Rice’s Financial Services Questions regularly by email, simply email info@kirkrice.co.uk stating Financial Services Questions in the subject heading and we will add you to our distribution list.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.

Join us on stand 422

If you are an established business, come and see us to find out how you can improve on the level of accountancy support your business needs.  We make sure you aren’t paying too much for your accountancy services, that you aren’t paying too much tax and that you have an accountancy partner who understands your goals.

For anyone looking to start their new business, we will be helping attendees gain answers to the fundamental financial questions that often concern small businesses, contractors and freelancers.  Questions including:

• How much of my turnover can I keep?
• How much will I need to put aside in order to pay my tax bill?
• What expenses can I claim against my business?
• Should I be VAT registered, and if so, do I really need to pay 20% tax?
• Am I on the right VAT scheme?
• Am I IR35 safe?
• Do I really need to invest in accounting software?
• Can I work from home or do I need business premises?
• How important is my business name?
• What pitfalls face franchisees?

Business Tax ‘Facetime’ Sessions

Kirk Rice will be the show’s partner for providing the Business Accounts & Tax FaceTime sessions. FaceTime sessions will involve 1-2-1 meetings with a Kirk Rice specialist where delegates can quiz us on any tax or accounting topics they like.  We are keen to see everyone who books a FaceTime session, so please do book a time slot in advance and come and see us with your questions.

Remember, if you have any burning accounting questions that can’t wait for the event, get in touch now via info@kirkrice.co.uk or call 020 3004 2232. 

We look forward to seeing you at our stand 422!

I have received an inheritance and considered investing some of it. I am 53 and looking for growth up until retirement and I will then want to get an income to top up my pension income. I am not risk averse as such but I am a bit wary with the stock market seeming to be at a high level that if I invest it will then crash. Do you have any particular views on this that could help or maybe reassure me?

Peter Sharratt Answers:

Stock Markets are at relatively high levels at the moment; the FTSE 100 Index for instance is at time of writing (3/05/13) at 6471 and so I can understand your concern over a possible ‘crash’. A common question I have started to ask clients is ‘when did the FTSE 100 Index reach its all-time high?’ (you might want to mentally answer this to yourself before reading on).

Responses vary and few get it right (2007/2008 are common responses) but almost all are surprised to find out that it was actually December 1999 when it reached 6930. So, despite being at what many perceive to be a high level the FTSE 100 Index is still 459 points or nearly 7% lower than it was 13 years ago! Does this mean it will continue to rise? Of course not, it will fall, I do not know when but it is inevitable and a feature of investing that you must be prepared to accept; investments go up investments go down.

You state in your question that you are 53 and looking for growth until retirement at which point income will be required. You do not state when you plan to retire but I assume that we are looking at 60 at the earliest and perhaps 65 at the latest. This means that any investment you are considering can be left for between 7 and 12 years which is a reasonable time to invest for, it is certainly not too short.

Also any investment that you invest in for growth can then provide income in future which means the investment could continue well in to your retirement. A reasonable time frame for investment (5 years or more) means there is a greater chance you will realise a profit when you need the money as time typically smooth’s out the ups and the downs. As always, do get advice before investing to ensure you fully understand the risk and options available.

If you would like more advice regarding this issue or any other financial services matter, please contact us. 

If you would like to receive Kirk Rice’s Financial Services Questions regularly by email, simply email info@kirkrice.co.uk stating Financial Services Questions in the subject heading and we will add you to our distribution list.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.

I have recently left the company that I have been working for since I left University and I was a member of the Final Salary Pension. What happens to this Pension and is there anything I should be doing with it?

Peter Sharratt Answers:

You will now have a Preserved Pension with your previous employer which will be calculated based on your length of Service with them (date of joining the Pension to date of leaving). Your Final Salary at date of leaving and finally the Schemes Accrual Rate which will typically be 1/60th or 1/80th. If as an example your Scheme had an Accrual Rate of 1/60th and you had 12 years of Service with a Final Salary of £50,000 you would have a Preserved Pension of £10,000pa (12/60 X £50,000).

Preserved Pensions are often referred to by clients as being Frozen but in fact they will (usually) be revalued (increased) up until your Normal Retirement Date. The rate of revaluation can vary but it will typically be RPI (inflation) subject to a maximum of 5%pa. You can leave the Preserved Pension as it is and be fairly certain about the Pension Income it can provide at retirement. Alternatively the Pension will also have a Transfer Value which is the amount of money the Pension Scheme will pay to another Pension to buy you out of the Final Salary Scheme. You can have this Transferred in to your new employers Pension Scheme should they offer one or indeed to a Personal Pension.

Transferring means you are giving up an Income which to all intents and purposes is Guaranteed and exchanging it for a Pension Income that is unknown and NOT Guaranteed (unless your new employer operates a Final Salary Pension Scheme which would accept the Transfer on an Added Year Basis i.e. extra service). An Independent Financial Adviser will be able to compare your Final Salary Pension with an alternative by conducting a Transfer Analysis which will include a Critical Yield. This is the Growth Rate required by the alternative Pension to match the Pension Income expected from your Final Salary Pension. From experience this will often be over 10%pa which is high and as a result Transferring is not usually a good option although other factors may have a bearing such as the death benefits, your health, marital status, attitude to risk etc. Ultimately the only way to find out what is best for you is to get it reviewed by an Independent Financial Adviser.

If you would like more advice regarding this issue or any other financial services matter, please contact us. 

If you would like to receive Kirk Rice’s Financial Services Questions regularly by email, simply email info@kirkrice.co.uk stating Financial Services Questions in the subject heading and we will add you to our distribution list.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.

With deposit rates remaining low I have considered putting some of my savings in to Premium Bonds. However, I have checked out some financial websites and they seem to intimate that they are a waste of time. What is your view?

Peter Sharratt Answers:

I see Premium Bonds as being an alternative home for Deposit based Savings; your Capital is Safe, it will not go down in value except due to the affects of inflation (true of any savings account) and you can access the money quickly – typically within 8 working days. In considering Premium Bonds it therefore makes sense to compare them to Deposit based Savings and if you are prepared to shop around it is possible to find a Savings Account paying in the region of 1.50%pa to 2%pa Gross.

Halifax for instance has an Instant Access Account (Everyday Saver) paying 1.50%pa*. Allowing for Tax the Net return for a Basic Rate Tax Payer is 1.20%pa and for Higher Rate Payers it is 0.90%pa. This account includes a Bonus of 1.0% for 12 Months at which point the Interest Rate would drop to 0.50%pa; net of Basic Rate Tax this drops to 0.40%pa and Higher Rate Tax reduces it to 0.30%pa.

To keep the Interest Rate at a competitive level (compared to savings rates generally) you would shop around after 12 months. Some savers are good at shopping around others (in my experience many) are not. For these people Premium Bonds are a viable alternative especially if they are Higher Rate Tax Payers. Comparing Premium Bonds to the best Interest Rate available is all well and good but if you are not going to take the time to find the best Interest Rate it is a meaningless comparison.

For such individuals it is more appropriate to compare Premium Bonds to the Interest they are likely to be getting rather than what they could get i.e. 0.40% to 0.30% depending on their Tax status. In monetary terms this would be £120pa to £90pa based on a Deposit of £30,000 (figure selected as it is the maximum allowed in Premium Bonds). The winnings from Premium Bonds are unknown but the worst case is you win nothing the best case is you win the £1 million. In reality you will hopefully win a few £25 pounds (smallest prize) and possibly the odd £50, remember though you could win nothing, but it does not take too many £25 wins to give you a return equal to the Interest you have given up with the prospect of winning more. Some may feel the loss of £120pa to £90pa is worth it for the potential to win more.

*SOURCE; MoneyFacts Issue 294, April 2013. For further details visit the NS&I website at www.nsandi.com.

If you would like more advice regarding this issue or any other financial services matter, please contact us. 

If you would like to receive Kirk Rice’s Financial Services Questions regularly by email, simply email info@kirkrice.co.uk stating Financial Services Questions in the subject heading and we will add you to our distribution list.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.

I am due to retire and I have a Personal Pension which I need to decide how to take. I have read a bit about Annuities and Drawdown. I like the security of the Annuity but feel locked in to a decision which may prove to be wrong in future. The flexibility of the Drawdown appeals but I am concerned that my income is not guaranteed. What would you suggest?

Peter Sharratt Answers:

An Annuity provides a Guaranteed Income for your life time and you can include additional benefits such as a Spouses Pension of 50%, 66% or even 100%. It also possible to have the Annuity set up so it increases each year either at a fixed rate (3%pa or 5%pa) or Inflation. A Guarantee Period of 5 or 10 years can be included which means should you die within the Guarantee Period the Income will continue to be paid to your beneficiaries for the remainder of the Guarantee Period.

Including some or all of these will reduce the Income you receive and the Annuity cannot be changed. In this respect the Annuity is very inflexible, but it does provide a Guaranteed Income for your lifetime. A Drawdown can provide an Income via Withdrawals from the Pension which remains invested. There is a Maximum Withdrawal (applicable to Capped Drawdown only; Flexible Drawdown has no Maximum) and you can vary the amount you take and the frequency. The Minimum Withdrawal is Nil. You are not tied to the Drawdown; you can change it to an Annuity in future. But it remains Invested and has more risk than an Annuity – your future Income could reduce.

There are now products available that aim to address the concerns some Retirees have regarding the lack of flexibility provided by Annuities and the Risks associated with Drawdown. One is a Fixed Term Annuity. This provides an Income for a pre-agreed period typically 5 or 10 years. At the end it provides a Guaranteed Maturity Value which can then be used to purchase a new Annuity based on your circumstances then. This Annuity may be higher or lower than the original Annuity.

There are now also Drawdown Pensions which give a Minimum Income Guarantee. The Guaranteed Income will be lower than an Annuity but having it may give you reassurance to consider a Drawdown, especially if you do have other Pension Income to fall back on. The Guarantee is provided at extra cost via Insurance within the Pension. As a result such a Drawdown would typically have higher charges than a Drawdown without the Guarantee. There will usually also be a limited number of Funds to choose from.

If you would like more advice regarding this issue or any other financial services matter, please contact us. 

If you would like to receive Kirk Rice’s Financial Services Questions regularly by email, simply email info@kirkrice.co.uk stating Financial Services Questions in the subject heading and we will add you to our distribution list.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.

My Pension has something called Lifestyling included. What is this?

Peter Sharratt Answers:

Lifestyling will gradually move your Pension Fund/s to Cautious Funds/Assets as you get closer to retirement. The process will typically start 5 to 10 years prior to your nominated Retirement Age although it will vary from one provider to another as will the actual timing i.e. it could happen monthly or annually. The aim is to try and protect your Pension Fund as you near retirement and avoid the risk of it falling sharply should there be a stock market crash as we experienced in 2008/2009 following the Banking crisis.

The whole process is automatic; there is no one influencing the process. It will generally switch 10% or 20% a year from the existing fund/s which maybe a Managed or pure Equity (shares) Fund in to Cash or Gilt based Funds. This can be good especially if you do not regularly review your Pension. But it can also be bad as there is no consideration given to what the market conditions are at the time of the switch. You could argue for instance that when the stock market falls it is not a good time to sell and invest more cautiously as you miss out on the eventual recovery.

Equally though it could protect the Pension from further falls. The point to be aware of is because it is automatic, there is no consideration given to is it a good or bad time or indeed appropriate for you now. Especially important when you consider that Lifestyling will normally be included when you start the Pension; this could have been over 15 years ago at a time when your circumstances and plans were different. Lifestyling will start in a set period (5, 10 years) prior to your nominated Retirement date but in reality you may retire earlier and Lifestyling could be starting too late leaving your Pension exposed to stock market falls (or gains). If you retire later Lifestyling may start too early leaving your Pension to miss out on any stock market gains (or falls).

Personally I think regular reviews (annually) are a better substitute as they allow you to react based on market conditions, your current and future plans and of course your risk profile. The downs side is that there may be an additional cost for reviews. A pension is a long term commitment. Your eventual income will depend on its fund value at retirement, future interest rates and tax legislation.

If you would like more advice regarding this issue or any other financial services matter, please contact us. 

If you would like to receive Kirk Rice’s Financial Services Questions regularly by email, simply email info@kirkrice.co.uk stating Financial Services Questions in the subject heading and we will add you to our distribution list.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.

If you have any income or gains, wherever they have arisen, which you haven’t told the Taxman about, the thought of going to him to tell him you may have done something wrong may put you off doing it and many people who have made disclosures state their fear of the UK tax authorities as the main reason for not coming forward.

This is an opportunity to start again on a level footing with HMRC.

It is also an opportunity to negotiate with HMRC over how you will settle any tax due and there are many different methods of doing so – it doesn’t necessarily all have to be paid in one lump sum.

However, you should be aware that the Isle of Man disclosure facility is not the first of its kind and there are other facilities available that might be more appropriate in your circumstances.

There are facilities that offer legal protection from prosecution for tax evasion, and therefore from the penalty of prison, and so you need to take professional advice before you contact HMRC.

You must beware – time is ticking. You need to act quickly to make a disclosure before you receive a tax enquiry notice and the Taxman calls you to account.

Kirk Rice LLP has the necessary expertise to help you choose the right scheme and make a disclosure. We work closely with lawyers to ensure the best outcome is achieved and you are protected as far as possible.

If you wish to make enquiries then please call us on +44(0) 203 004 2232 and ask to speak with our Tax Manager, Phil Kinzett-Evans.

I have been reviewing my insurances and have a Critical Illness policy which costs over £50pm. I can afford it but am I well aware (and hopeful) that I may never have a Critical Illness. Am I better off putting the £50 in to something else such as a saving or investment to accumulate capital which I would have access to if anything did happen in future?

Peter Sharratt Answers:

Critical Illness is insurance and, as you say, hopefully the event you are insured for will not happen, but it may and if it did you need to consider how you would manage financially. You could save the premium and over a period of a year you would have accumulated £600.

Over 10 years it would be £6,000 (plus any interest). I suspect that the cover your Critical Illness provides is significantly greater than both figures and I guess the point I am trying to make is that you will never be able to save as much as you will be able to insure yourself for (subject to underwriting of course). And so the decision to save the £50 per month rather than using it to insure yourself is based on the belief that it will not happen to you.

Hopefully it will not but the following claims data supplied by Scottish Provident (one of a number of providers) may help reiterate the importance of this type of insurance. The data is for claims from the 01/01/12 to 31/12/12. The number of claims paid was 1,061 with a total pay-out of £94,313,521. The average age of a claimant was 48. The average time period a policy was in force before a claim was 9 years 4 months. 60% of claims related to Cancer of which over a third (and largest) related to Breast Cancer claims and a quarter were attributed to Bowel/Colon, Malignant Melanoma and Prostate Cancer.

The next highest claims were for Heart Attack at 13%. The 45 to 49 age band accounted for 23% of claims and under 40’s accounted for 18%. Critical Illness Policies usually include Children’s cover for no additional cost and a sad figure to read is that Scottish Provident paid out for 36 children claims. Providers are also very upfront about the claims they have NOT been able to pay.

In total Scottish Provident had 82; of this 64 (5%) were NOT paid because the illness suffered did not meet their Critical Illness definition and 18 (2%) were declined due to non-disclosure. Non-disclosure is where the applicant has not disclosed information at the time of the application which may have affected Scottish Provident’s decision to provide cover.

The last two points are very important, you need to be clear about what is and is not covered but also make sure when applying that you disclose everything, if in doubt, tell them. Personally I think it is worthwhile and I am glad that at 48 I have cover!  A copy of Scottish Provident’s 2012 Critical Illness Claims Report can be found here.

If you would like more advice regarding this issue or any other financial services matter, please contact us. 

If you would like to receive Kirk Rice’s Financial Services Questions regularly by email, simply email info@kirkrice.co.uk stating Financial Services Questions in the subject heading and we will add you to our distribution list.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.